In early spring, when the news came out that housing had entered a double dip – prices were falling again – it seemed like an outlier. The jobs market was picking up steam. Corporate profits were up. The stock market was rising. A lot has changed in just a few months. Now the question is whether housing was a leading indicator for the economy, or was it just leading the economy.

Today, there was relatively good news out of the housing sector. The Census Department reported that housing starts fell 1.5% in July, which was less than the nearly 5% forecasters had expected. That means home builders are on pace to build only 25,000 fewer homes in the next year than they were just a month ago. The fact that this registers as good news is the biggest sign of how weak the housing market is. At the height of the housing bubble builders were putting up homes at a rate of about 2.25 million a year, or nearly four times as fast as now. Later this week, the National Association of Realtors will release data for the number of existing homes that sold in July. Most forecasters think sales will rise slightly. But housing expert Thomas Lawler thinks even the today’s diminished expectations for real estate are too rosy. He expects sales to drop slightly.

Last week, the Obama administration announced a new plan to try to boost the housing market. It was the first major proposal from the administration on housing in a while. The idea is to recruit private investors to buy the hundreds of thousands of homes now owned, due to foreclosures, by Fannie Mae and Freddie Mac and turn those homes into rental units. Some have questioned how smart a plan this is. But the real question is whether the government should be doing anything at all.

It has been taken as dogma for some time that turning around housing is key to turning around the economy. But how big a drag is the housing market on the economy? The answer is that housing has been a meaningful contributor to the fact that our economic recovery has not been slower than expected. And turning the housing market around would likely add a significant boost. Still, some have exaggerated the drag housing has had on the recovery. It is not alone the reason we are stuck at over 9% employment.

Brad Plumer last week, over at Ezra Klein’s blog, did a pretty good job of detailed the ways housing has recently been a drag on the U.S. economy. Here’s how it adds up: The most direct impact on the economy that housing has has to do with the actual building of houses. In the mid-2000s, home builders spent $600 billion a year on land, materials and workers’ salaries putting up colonials, ranches, split-levels and, of course, McMansions. But there are many other ways the housing market boosted the economy in the past decade. Another is the wealth effect. When housing prices are rising, people feel richer. Dean Baker at the Center for Economic and Policy Research computes that housing-motivated spending accounted for as much as $500 billion annually in the mid-2000s. Together that’s $1.1 trillion or about 7% of GDP. That’s a lot. For reference, GDP dropped about 4% during the recession.

Still, Chris Thornberg of Beacon Economics says there is a little hyperbole when people say the economy can’t recover without the housing market. That’s because much of what we normally think of the housing market doesn’t produce a lot of economic value. “Realtors have perpetuated the fraud that selling homes back and forth between people is good for the economy,” says Thornberg. “I’m not convinced that does that much for the economy.”

The wrinkle is for all that economic activity, housing doesn’t create a tremendous amount of jobs. At the height of the housing boom, there were just over 1 million people who were employed in the home building business, out of a total workforce of about 150 million people. There are now 450,000 fewer people working in residential construction – huge drop to be sure. But even the total number of unemployed people in all construction jobs, which includes more than just housing, equals just 1.1 million. If all those people were magically able to find jobs tomorrow the unemployment rate would only drop by less than one percent to around 8.4%.

Some economists have said that those numbers hide the true job killer of a poor housing market – a lack of mobility. People are stuck in houses they can’t sell, so they can’t move for a new job. But there is little evidence that people have stopped moving for work. Indeed, with so many people underwater on their mortgage – owing more than the house is worth – it may be easier than ever to leave your home behind. Baker says the states with the largest drops in housing prices have had the largest outflows of workers, not the other way around.

That doesn’t mean we shouldn’t try to fix the housing market. To have a function economy we need a functioning housing market, where people can buy houses and not be afraid they will lose the money they put in. Still, I think it’s valuable to consider the true value housing adds to the economy when deciding what to do next.